Felipe Lungov: Creative Destruction in the App Market

One of the key features of any free market is that the main players are always rotating. No one stays on top forever. Mark Perry shows that only 53 companies that featured in the Fortune 500 list in 1955 are still in the list today. Almost 90% of them failed, were sold, merged or fell out of the list. That constant rotation, driven by consumer choices, is what Joseph Schumpeter called creative destruction.

I have just come by another very compelling demonstration of Schumpeterian creative destruction. It must be said this is a phenomenon only seen in relatively free markets. And in such a world where every governement interferes with virtually every aspect of the economy, free markets are hard to find.

But thanks to the internet, we still have a few. One of them is the market for business chat apps. Matthew Guay is a senior editor and writer on the Zapier team. Zapier is itself an app that connects over a thousand different apps such as Trello, DropBox, WordPress and others. So they have a very good understanding of which business apps are gaining popularity and which apps are losing ground over time.

Late last month he wrote a very interesting story on how business chat apps evolved over the last few decades. And they did not start as business apps. He began his recollection with Aol Instant Messenger (I also remember ICQ, and it was not in his list), moving to MSN and to Skype, all of them meant for individuals, not companies.

As people began using those apps for work and work collaboration, Campfire (2006) and HipChat (2009) came along expanding the chat functionalities with others specifically tailored for businesses, such as chat rooms and file sharing.

And now there is Slack. According to Guay, Slack today has 88% of the team chat market on Zapier. They just slashed the competition.

Recently, Slack acquired HipChat. Which had previously displaced MSN and Skype being used as business chat apps. And they had displaced others before that.

As you can see, this is the same story being told over and over. Note how many different chat apps were once king. And then always comes a newcomer, slips in and takes the crown.

Never for long. According to Guay, there are already two new strong contenders in the game, Discord and ChatWork.

Guay also talks about how Discord is different from Slack. Some similar features, but a few distinguishing ones that makes their current growth rates very different. As he puts it, “new ideas built on previous ones are what grow and change the market.” Matt Ridley cunningly says that when ideas meet, they have sex and spring new ideas.

So what will be the most used chat app in businesses fifteen years from now? No one knows. All we know is that no one has ever held that position for that long. I have no reason to believe any one ever will.

The winners aren’t necessarily first. Instead, they grow the market. They take an old idea, approach it from a new direction, and grow the market when suddenly the old idea fits many more use cases. Then someone else takes their concept, respins it, and opens the market a bit more.

Before long, it’s hard to imagine how apps worked before the new category leader defined the category. That’s the creative evolution that makes tech a continuously changing space.

It is actually not just tech. Any market could be like that. The difference there is in the app market is that it cannot be easily regulated by governments.

Governement regulations are meant to protect big players from small rising competitors. By setting requirements to operate in a given market, those requirements are always more easily met by big companies than by small companies. So the big companies may have the extra cost to meet those requirements, but they are also granted a much more profitable longlasting cartel over the consumers.

If a government decided to regulate the app market in their country, developers from other countries would still be able to outcompete that first country’s big players by offering their innovative and cheaper apps in the world wide app market. So those regulations would serve the local big players no protection at all.

The fact that no government heavily regulates the app industry anywhere only proves that the real purpose of all the other regulations is, as I just explained, to protect big players.

But that is another topic. What I am trying to say here is that any market could work like the app market. People tend to believe that a company’s oversize itself grants them an everlasting preponderance over their markets.

That is simply not so. If a company cannot use its large size to seize political power (and the fact that they always do is probably what causes people to make that mistaken association between size and lifespan), it will only stay big as long as it keeps serving their consumers better than new entrants. Which will never be long.

If the people do not entrust their politicians the power to direct their economy, size becomes no advantage at all. Just like it already happens in the apps industry.

Ludwig von Mises was right. In a free market, the only king is the consumer. Companies struggle to be the one to serve their king. May Slack enjoy their turn as king – of the servants.

Felipe Lungov is an economist and President of Academia Liberalismo Econômico in Brazil.

14 Responses to Felipe Lungov: Creative Destruction in the App Market

But that is another topic. What I am trying to say here is that any market could work like the app market. People tend to believe that a company’s oversize itself grants them an everlasting preponderance over their markets.

Very good post, however it seems to me you are using the example of a market that is UNABLE to be truly regulated by governments at this time, Apps and saying all markets work like this.

The markets that can be controlled by government have in many instances no ability to break through to the other side.
Are you saying that all markets/ producers suppliers etc will eventually break through and the best will survive, ( as this is patently not so in Corporatised/regulated industries and markets)?
How can you apply what the app market is doing to say the transport industry in Australia, where better suppliers with better service and ideas are nearly all unable to even stay in business due to corporatism and regulations?

Recently, Slack acquired HipChat. Which had previously displaced MSN and Skype being used as business chat apps. And they had displaced others before that.

It would be interesting to see how business chat is defined and where these measurements are coming from because in every large orgnisation I’ve worked in Skype is the internal chat app used given it was acquired by Microsoft and integrated into windows.

Even for any video chat purpose (outside of dedicated corporate video chat applications) such as interviews with overseas or interstate organisations I’ve only ever seen Skype used as the standard app.

…or Google. There are plenty of contenders in the search market. Facebook was even rumoured to be having a crack at it. Microsoft tried with Bing, to no avail, although Bing isn’t a bad search engine. I use Duck Duck Go most of the time, but if I can’t find what I’m looking for, I go to Bing, then back to Google.

I found within the last year what many others have found; Google is twisting search results for political ends. That’s the best reason for not using it, and it’s what will bring them undone. Technically, Google is unassailable, but hubris is destroying it, and the sooner the better. People like me are willing to accept poorer quality search results (most of the time at least) rather than tolerate propaganda.

It’s worth noting, though, that the shrinking of Google will have nothing to do with “creative destruction.” It will be politically motivated company suicide, and a coup by shareholders may fix that, even as shareholder dissatisfaction is registering with Facebook and Twitter.

…or Google. There are plenty of contenders in the search market. Facebook was even rumoured to be having a crack at it. Microsoft tried with Bing, to no avail, although Bing isn’t a bad search engine. I use Duck Duck Go most of the time, but if I can’t find what I’m looking for, I go to Bing, then back to Google.

I think Google will be incredibly difficult to unseat because it has so many tentacles throughout the internet, YouTube being one major one. And despite Google’s manipulation of search results when it comes to political issues, none of the other search engines comes close to what Google can find when it comes to other things. I’ve tried all of them and simply have to revert back to Google every time.

According to a report in the Wall Street Journal, Facebook has spent the last year asking banks like JPMorgan Chase, Wells Fargo, Citigroup and U.S. Bancorp for partnerships that would result in Messenger enhancements that unlike 360 degree video would be 360 degrees of your checkbook instead. But hey, maybe you could get fraud alerts in Messenger instead of your banking app. That seems better right?

If a company cannot use its large size to seize political power (and the fact that they always do is probably what causes people to make that mistaken association between size and lifespan), it will only stay big as long as it keeps serving their consumers better than new entrants.

This may be true but you forgot about economies of scale. In markets where economies of scale bring big advantages, the established big players will stay on top much longer. There was a very insightful article by Alan Greenspan about how Alcoa (or whatever it was called) managed to stay on top of alumina market for a long time, when the size of the market was not sufficient to make more than one significant player efficient.

The markets that can be controlled by government have in many instances no ability to break through to the other side.

Markets can only be controlled by government if people believe governments should control that market for any reason. The point of me writing this article is to show how markets would be if we didn’t ask that of politicians.

It would be interesting to see how business chat is defined and where these measurements are coming from…

I used the information from a Zapier blog post. Zapier is an app that connects other apps together, and together with IFTTT they are the biggest player in that business. According to them, Slack has 88% of the market share, which of course does not mean other apps cannot be seen at large.

This may be true but you forgot about economies of scale. In markets where economies of scale bring big advantages, the established big players will stay on top much longer.

This is certainly true, but it is not an absolute advantage as some people believe. Changes in the Fortune 500 show us that an innovative approach coming from new companies to the issue that that market is trying to solve for the consumers is a better edge than economies of scale.

The beginnings of the solution have existed since 2010 in the form of diasporafoundation.org
There is room for much technical improvement, of course, but the way forwards to a solution is there. It just doesn’t have the popularity yet.

I used the information from a Zapier blog post. Zapier is an app that connects other apps together, and together with IFTTT they are the biggest player in that business. According to them, Slack has 88% of the market share, which of course does not mean other apps cannot be seen at large.

Well that makes sense given they’d probably only see a portion of the market then, i.e. the portion that uses an app integration service. They wouldn’t see (all or at least the vast majority of) Skype users given it is integrated into Windows and used that way instead of via an app integration service.

Would you mind linking to that blog post, though? I can’t seem to find it via google.

Well that makes sense given they’d probably only see a portion of the market then, i.e. the portion that uses an app integration service. They wouldn’t see (all or at least the vast majority of) Skype users given it is integrated into Windows and used that way instead of via an app integration service.

It could be, yes. But I still believe Slack is the top reference in the market. Even Microsoft (who owns Skype) has been trying to mimic Slack: